Real Estate: New plan targets underwater borrowers

Sep. 8, 2010

Written by

Associated Press

LOCAL NUMBERS

» As of June, bank-owned properties, short sales and homes with special conditions made up 65 percent of actively listed homes in the market, according to the Northern Nevada Regional MLS.» Spanish Springs and North Valleys experienced the most growth during the bubble years, and now properties with special conditions account for 81 percent of active listings in the North Valleys and 74 percent in Spanish Springs.

DISTRESSED PROPERTIESQuarterly foreclosure-related activity recordings for Washoe County in second quarter of 2010Notices of default: 1,987Notices of trustee sale or auction: 1,819Foreclosures: 877

DO YOU QUALIFY?» Eligible borrowers must be up-to-date on their mortgages, though many people who already have received loan modifications through other programs are still eligible.» The plan is limited to loans in which homeowners owe at least 15 percent more than their home's current value.If you meet these requirements, contact your lender for more information on how to apply for a refinanced loan.

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WASHINGTON -- The Obama administration is trying to jump-start its sputtering attempts to tackle the foreclosure crisis with an effort to assist homeowners who owe more on their properties than their homes are worth.

The Federal Housing Administration now is allowing lenders to give these borrowers refinanced loans backed by the government.

The lenders will be required to forgive at least 10 percent of the original mortgage amount. Investors who have control over the mortgages as part of their large portfolios will select which borrowers are invited to participate.

The plan was first announced in March. Its rollout represented the latest of numerous efforts by the administration to address the housing bust. So far, the government has only nibbled around the edges of the crisis, as its programs have run into numerous problems.

The lending industry was ill-prepared for a crush of distressed homeowners, the economy worsened and millions of homeowners had taken on so much debt that their financial woes have been nearly impossible to resolve.

Nearly half of the 1.3 million homeowners who have enrolled in the Obama administration's main mortgage-relief program, overseen by the Treasury Department, already have fallen out over the past year.

Many borrowers said the government program is a bureaucratic nightmare, with banks often losing their documents and then claiming borrowers did not send back the paperwork. Banks said borrowers often didn't return the required documents.

The new refinancing program takes a different approach. It allows investors in mortgage-backed securities to evaluate their holdings and select borrowers that will be offered refinanced mortgages guaranteed by the FHA.

The theory is that there are some loans that investors simply want to unload because they have a high risk of default.

However, when faced with the choice between slashing the amount borrowers owe on their home loans and foreclosing, lenders have generally chosen to foreclose on borrowers. Many experts doubt the new program will persuade investors to change their minds.

While the government estimates that between 500,000 and 1.5 million homeowners could be helped through the new program, Keefe, Bruyette & Woods Inc. analyst Bose George called that estimate "extremely optimistic."

George said investors are likely to only offer refinances to borrowers who have seen their home values plunge to the point where they owe 40 percent more than their home's current value. Those homeowners, he said, are in danger of walking away from their mortgages.

"We're assuming that the impact is minimal," he said.

To qualify, borrowers must be up-to-date on their mortgages, though many people who already have received loan modifications through other programs still are eligible. The plan is limited to loans in which homeowners owe at least 15 percent more than their home's current value.

Analysts at Barclays Capital estimated last month that the refinancing program would only aid between 200,000 and 300,000 homeowners. If it reaches that many, it would be a small share of the number of Americans with so-called underwater mortgages.

As of the end of June, about 11 million U.S. homes, or 23 percent of those with a mortgage, were in this position, according to real estate data provider CoreLogic.